Crude oil slips below $40 for first time since April

Price for US crude fell below the psychologically important level of $40 a barrel in early trading on Tuesday. Analysts warn oversupply could lead to a further $5 drop in the oil price.

US West Texas Intermediate (WTI) dipped to $39.86 - its lowest level since April 20 - before settling at $40.75 a barrel as of 14:00 GMT. The North Sea benchmark Brent crude rose 89 cents to $43.03 per barrel.

“The world is so oversupplied and the pace of rebalance is so slow that even geopolitical factors such as the ongoing civil strife in Nigeria are not enough to offset the fall in prices,” said Gao Jian, an energy analyst at SCI International as cited by the Wall Street Journal.

Crude prices rallied earlier in the summer on the back of wildfires in Canada and oil worker strikes in Kuwait. However in recent weeks, they have come under renewed pressure due to increased US oil drilling activities, Libya’s expected return to the export market, and the possible output increase by OPEC members Iraq and Iran.

That made investors shift their focus back to the oversupply issues, saying it might take longer than expected for supply and demand to rebalance. Oversupply could bring crude back to $35 per barrel, analysts warn.

Mike Dragosits, senior commodities strategist at TD Securities, identified $35 as a critical support level. "I think if it got down to $35, you'd have people stepping in. The fundamentals are a lot better than they were at the beginning of the year," Dragosits told CNBC.

Iran's Oil Minister Bijan Namdar Zanganeh told state television that the market was oversupplied but predicted balance to be restored.

According to a Bloomberg poll of at least 20 analysts, the crude market may rebound to $57 per oil barrel in 2017.

“We’re looking at a market that’s still in a very slow process of rebalancing and we don’t think that you’ll get a sustainable deficit until the second quarter of 2017,” said Michael Hsueh, a strategist at Deutsche Bank. “Those deficits are necessary to draw down global inventories, but that will still take until the end of 2018, it appears,” he said.